How to Profit on Costco Wholesale Corporation’s (COST) Comeback

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The retailer selloff following Amazon.com, Inc.’s (NASDAQ:AMZN) acquisition of Whole Foods was seriously overdone. Grocery and retail stocks were hammered across the board, but few suffered as much as Costco Wholesale Corporation (NASDAQ:COST). But the company is out to set the record straight, and tomorrow’s fourth-quarter earnings will drive that point home for Costco stock.

How to Profit on Costco Wholesale Corporation's (COST) Comeback

By the numbers, COST is is expected to report a quarterly profit of $2.02 per share, up from earnings of $1.77 per share a year ago. Meanwhile, revenue is seen advancing 13.6% year-over-year to $41.55 billion.

Still, the economy hasn’t been kind to Costco this year, and the company has missed expectations twice in the past four quarters. As a result, EarningsWhispers.com reports that the fourth-quarter whisper number for COST stock rests at $2.01 per share — a penny below the consensus estimate.

Outside of earnings forecasts, however, expectations are largely bullish. According to data from Thomson/First Call, Costco stock has attracted 21 “buy” ratings, nine “holds” and no “sell” ratings. There is still room for improvement, however, with the 12-month consensus price target of $181.41 representing only an 9.8% premium to yesterday’s close.

Turning to the options pits, short-term traders are largely bullish on COST stock’s prospects. Currently, the weekly Oct 6 put/call open interest ratio arrives at a positive reading of 0.56, with calls nearly doubling puts among options most affected by tomorrow’s quarterly earnings report.

Costco Stock
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Overall, weekly Oct 6 implieds are pricing in a potential post earnings move of about 3% for Costco stock. This places the upper bound near $170, while the lower bound lies at $160.

Technically speaking, the $170 region could be a tough level to crack, as it marks COST stock’s post-plunge highs back on June 16 (following the Amazon/Whole Foods announcement).

A breakout above here would be considerably bullish.

Meanwhile, support remains firm in the $160-$161 region, with Costco’s 200-day moving average rising into the area.

Two Trades for Costco Stock

Call Spread: While the technicals point to overhead resistance, there is plenty of bullish sentiment to help drive COST higher. Those traders looking to side with the bulls ahead of Costco earnings might want to consider an Oct $165/$170 bull call spread. Note: We are not trading the weekly Oct 6 series to allow this trade more time to play out.

At last check, this spread was offered at $1.87, or $187 per pair of contracts. Breakeven lies at $166.87, while a maximum profit of $3.13, or $313 per pair of contracts — a nearly 68% return — is possible if COST stock closes at or above $170 when October options expire.

Put Sell: With Costco stock trading on the verge of overbought territory, and technical resistance looming overhead, some traders may want to take a more cautious short-term stance. Along those lines, an Oct $158 put sell has plenty of potential.

At last check, this put was bid at 85 cents, or $85 per contract. As usual with a put sell, you keep the premium as long as Costco stock closes above $158 when October options expire. On the downside, if COST trades below $158 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $158 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/costco-wholesale-corporations-cost-stock-comeback/.

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